The Music Goes on and on

[sgd]

Lets see when the Fed printing money so many years the markets oil gold commodities property all cheong everybody making moola from gravy train but at same time point the blame finger at the Fed and say they dunno or don't have clue what the hell they doing or are running a scam.

So now when the fed is going to exit QE, throttling liquidity markets are spooked and tanking everywhere and this is suppose to be good for market investors? Why nobody feels like applauding?

the whole thing is contradicting if you ask me.

[CityFarmer]

Lets see when the Fed printing money so many years the markets oil gold commodities property all cheong everybody making moola from gravy train but at same time point the blame finger at the Fed and say they dunno or don't have clue what the hell they doing or are running a scam.

So now when the fed is going to exit QE, throttling liquidity markets are spooked and tanking everywhere and this is suppose to be good for market investors? Why nobody feels like applauding?

the whole thing is contradicting if you ask me.

Yes, contradicting indeed, because the FED is a easy target and a convenience one.

[greengiraffe]

Central banks’ ‘extreme’ QE poker game
PUBLISHED: 0 HOUR 12 MINUTES AGO | UPDATE: 0 HOUR 0 MINUTES AGO
SHARE LINKS:email
inShare
submit to redditprint-font+fontReprints & permissions
Central banks’ ‘extreme’ QE poker game
Pine River’s co-chief investment officer Steve Kuhn at the Citigroup conference in Sydney: ‘I get a little queasy at Ben ­Bernanke’s self-satisfaction.’  Photo: Peter Braig
VESNA POLJAK
One of the partners of hedge fund Pine River has warned the end of Ben Bernanke’s tenure at the US Federal Reserve has parallels with Alan Greenspan’s retirement, posing a worrying sign for markets as US stimulus comes to an end.

Pine River Capital Management co-chief investment officer Steve Kuhn recalled how Mr Greenspan was applauded when he left the Fed in 2006. It took years for the true consequences of Greenspan-era policies to be properly understood, beginning with the onset of the subprime loans crisis.

Mr Kuhn said the actions of central banks even today were coming from “extreme places”. His comments, in an interview with The Australian ­Financial Review on Tuesday in Sydney, come as the benchmark 10-year US ­government bond yield hit a 2014 low of 2.24 per cent.

“Remember, when Greenspan retired he was the maestro, he was at the top of his game, there was a lot of fanfare. Greenspan in retrospect looks less like the maestro today than he did when he retired,” Mr Kuhn said.

“I get a little queasy at Ben ­Bernanke’s self satisfaction to be honest. There’s echoes.”

Markets are at an inflection point as the Fed this month finishes its bond purchases after years of ultra-stimulatory monetary policy led by Mr Bernanke and carried on by his successor Janet Yellen.

Experts have acknowledged the success of quantitative easing to date but are becoming uncomfortable with what lies ahead and how the Fed will manage its $US4 trillion ($4.5 trillion) balance sheet and raising interest rates.

Market volatility has shot up, coinciding with the growing awareness of the turn in the rates cycle.

“When they started the [quantitative easing] there was a lot of criticism from economists that the theory doesn’t work, it won’t do anything. That was [Bernanke’s] line, ‘it works in practice but it doesn’t work in theory’. That’s reminiscent of the mood that was around Greenspan when he retired. When one senses hubris, one gets a little bit cautious.”

TIGHT ACCESS TO CREDIT
Mr Bernanke also made headlines earlier this month when he revealed during a conference that he was knocked back on a loan to refinance his house in Washington because of his change in employment status. Mr Kuhn agreed that loans were now harder to come by in the US.

“The credit standards now in the US have gone the opposite way and now the problem with the US mortgage ­market is access to credit is exceedingly tight,” he said.

Mr Kuhn is based in Austin, Texas. Upon arriving in Sydney on the weekend he managed a six-hour bike ride to ward off jetlag. He made a name for himself as a specialist in trading ­convertible bonds and mortgage-backed securities.

Mr Kuhn said expectations for negative real returns on bonds of around 2 per cent and modest equity market returns of 4 per cent meant “that gap of 6 per cent is one of the largest we’ve ever seen”.

He likened the actions of central banks in undertaking QE to a poker game run by policymakers which they have no intention of winning. But not all players were alert to the dynamic.

“Say you’re hosting a party and you’re the central bank. Your goal in the party is that everyone has a good time – as Keynes would say, ‘release the ­animal spirits’.

“You want to spice up the game. Do all kinds of crazy things so that other people are winners and they have fun at the party. The goal of the Fed is not to make money on their bond purchases – that’s not the point.

“As an investor you don’t have to play the same game they’re playing. You should avoid that game and you should try and find other things to do that will try and have a higher expected return.”

He suggested these could lie in ­equities with bond-like characteristics ­such as pharma company Pfizer or ­Japanese stocks with their yield, ­stable cash flows and new focus on ­capital management.

The Australian Financial Review

BY VESNA POLJAK
Vesna Poljak
Vesna covers markets from our Sydney newsroom.

[greengiraffe]

Goldman Sachs’ Patel plays down volatility fears
THE AUSTRALIAN OCTOBER 15, 2014 12:00AM

Damon Kitney

Victorian Business Editor
Melbourne
Mitigating market fluctuations

THE chief executive of one of the world’s most powerful investment managers has downplayed concerns about global sharemarket volatility, labelling it “part and parcel’’ of an increase in risk appetite by international investors.

Sheila Patel, the Singapore-based chief executive, international, of Goldman Sachs Asset Management, said the market turmoil had not slowed down the levels of inquiry for alternative assets, small-cap equities and specific opportunities in energy, real estate or infrastructure.

“The interesting thing for me is a relatively broad-based increase in risk appetite over the course of this year by major investors. It has taken time though. I wouldn’t say everyone is ploughing in but the types of increases we have seen and the variety of the areas of interest is very interesting,’’ she told The Australian yesterday during a visit to Melbourne.

The Chicago Board Options Exchange Volatility Index, which measures US sharemarket volatility, is now at its highest since February.

The predicted end of the US Federal Reserve’s stimulus program, continued low growth in the European economies and recent moves by the IMF to lower predictions for global growth have all weighed on sentiment.

But Ms Patel, who is responsible for more than $US230 billion ($263bn) of Goldman’s total of more than $US950bn in funds under management, said that while market conditions may slow down the pace of allocations to riskier investments, “people haven’t looked at the recent volatility and said, ‘this is the end’.

In many cases, they look at the volatility as part and parcel of the shift. Very few shifts like this happen without an extended period of volatility while people make up their minds,’’ she said.

Ms Patel said she was optimistic about the outlook for the Chinese economy as it shifts from an investment to consumption focus.

“I am not hyper concerned about a change in China that would be dramatically negative for commodity producers like Australia that have a good tie-in there,’’ she said.

But she noted Australia needed to look beyond a dependence on commodity prices to focus on its strengths in regional tourism and as a destination for infrastructure investment.

But she said China’s decision to levy a tariff on coal imports of between 3 and 6 per cent needed to be watched carefully.

The move is designed to support China’s domestic coal sector, but big miners such as BHP Billiton have labelled it as “worrying” and called for a constructive resolution of free trade talks with the Chinese leadership.

“It is an aberration that bears watching. It is key place where China has to show that the ultimate goals of openness is real, not virtual and subject to rapid change,’’ Ms Patel said.

“Businesses don’t like change in any environment. For businesses to continue to invest in China, there is a big demand for consistency in this rule set. Will the reaction give a message that this is not acceptable to the global market? The critical question will be, will they take this reaction on board?’’

Echoing the CEOs of the big four retail banks in Australia and Macquarie Group this week, Ms Patel urged against another wave of major regulation.

The banks are concerned about further regulation flowing from the Murray inquiry and the G20 agenda, which could see them hit with sharply higher common-equity tier-one and mortgage capital requirements.

“Here there is a real opportunity to set a new benchmark as to what Australian investors should expect and deserve from the finance industry but I think that being too prescriptive is something that we need to be cautious about,’’ she said.

[greengiraffe]

Sell-off will be violent, RBA tells investors
THE AUSTRALIAN OCTOBER 15, 2014 12:00AM

Adam Creighton

Economics Correspondent
Sydney

INVESTORS should brace for a “violent” sell-off in financial markets as their naive beliefs about risk, liquidity, and interest rates are inevitably mugged by reality, a senior Reserve Bank official has warned, while reiterating the RBA’s desire for an even weaker Australian dollar.

In unusually frank remarks, the RBA’s head of financial markets, Guy Debelle, said recent spikes in volatility in currency and equity markets from historically low levels were modest and a small taste of things to come, slamming investors’ complacency and — somewhat curiously — their misguided faith in central banks’ projections.

“I find it somewhat surprising that the market in aggregate is willing to accept the central banks at their word and not think so much for themselves,” he said, ­arguing there was at least as much uncertainty about the future path of interest rates as in earlier ­periods.

“While there is more forward guidance from central banks than in the past, investors don’t have to believe it,” he said.

Dr Debelle, speaking at a Citi investment conference in Sydney, was puzzled that rising geopolitical tensions in the Middle East and Ukraine had not fuelled more volatility but was certain the recent eerie calm would end.

The VIX index — a global volatility benchmark based on US option prices — has hovered around levels lower even than before the GFC for much of this year, rising only in the last month as money has poured back into the US on rising prospects of higher interest rates, pushing up the US dollar. “There are reasons to suspect that the sell-off, particularly in fixed income, could be relatively violent when it comes,” Dr Debelle added, pointing to the 1994 bond market crash where volatility surged in the US and Europe after the Federal Reserve tightened policy.

The Australian dollar initially fell on Dr Debelle’s remarks — which reiterated governor Glenn Stevens’s claim about the dollar — but was trading slightly higher at US87.4c late last night. After a few days of heavy losses the benchmark S&P/ASX200 finished the day up more than 1 per cent to 5207. The past four trading sessions have seen three moves of more than 1 per cent.

Dr Debelle said new regulations had permanently reduced the financial system’s capacity for market making, which would mean even less liquidity than before the GFC during any sell-off.

“Market makers generally have just as much reluctance to catch a falling knife as any other market participant,” he said, suggesting too many investors were locked into trades on the assumption they could easily get out of them and an unknown share of financial positions were viable only with official rates near zero.

“On top of that, never underestimate the role of mechanical rules or mandates in driving market behaviour more than rational pricing,” he added.

Saul Eslake, chief economist at Bank of America Merrill Lynch, said extreme volatility couldn’t be ruled out but doubted the Fed would prompt it. “Surely there has never been an event so signalled and canvassed in advance than the tightening of US monetary policy at some point in 2015,” he said. “As for geopolitical events, they have tended only to have an impact on financial markets when they cause a spike in the price of oil,” Mr Eslake said, noting the global oil price benchmark had recently fallen below $US90 despite recent conflicts. Adam Lavis, co-head of equities at Citi, said volatility had picked up across both equity and stock markets in the past 48 hours and he expected it to continue. “It’s likely the Fed has been worried about over-inflating equity markets with new money,” he said.

Following reforms in the US and Britain, the RBA introduced a modest form of forward guidance into its monthly policy statements, having repeatedly suggested a “period of stability in interest rates” since February. “If the data moves unexpectedly in all likelihood so will the central bank,” Dr Debelle said.

“It’s not a Goldilocks world — things can change and this speech was a sensible way for the RBA to caution investors,” Mr Lavis said.

Dr Debelle reiterated the RBA view that the dollar, which fell about 6 per cent against the US dollar in September, was too high based on fundamentals and the economy would benefit if it fell further.

[greengiraffe]

http://www.businesstimes.com.sg/companie...ash-levels

Global fund raises cash levels
By
Cai Haoxianghaoxiang@sph.com.sg@HaoxiangCaiBT
15 Oct5:50 AM
THE BlackRock Global Allocation fund, with US$23 billion under management, has been selling US equities and raising its cash levels.

US equity allocations have been cut from 32 per cent of the portfolio at the start of the year to 22 per cent today. Various valuation measures there all

[greengiraffe]

Federal Reserve hints at extending bond buying program
DOW JONES OCTOBER 17, 2014 7:22AM

THE US Federal Reserve may want to extend its bond-buying program beyond October to keep its policy options open given falling US inflation expectations, Federal Reserve Bank of St Louis President James Bullard said.

“It would keep the program alive,” and the Fed’s options “open as to what we want to do going forward,” Mr Bullard said during an interview on Bloomberg TV.

The Fed has been winding down its bond-buying program, also called quantitative easing, which aims to stimulate the economy by lowering long-term borrowing costs. It decided at its September meeting to reduce the purchases to $US15 billion ($16.9bn) a month, and officials agreed to end the program after its October 28-29 meeting if the economy continued to improve as expected.

The Fed has repeatedly cautioned in its policy statements that the purchases “are not on a preset course,” and that the pace of reductions is contingent on policy makers’ “outlook for the labour market and inflation.”

But no other Fed official has indicated he or she might favour continuing the bond-buying programs after this month. Several officials opposed the purchases from the start and some who have supported them in the past believe the benefits diminish over time and might be outweighed by the risk of fuelling financial instability.

Mr Bullard, who is not currently a voting member of the monetary policy-setting Federal Open Market Committee, has often taken positions outside the consensus view among central bank officials. He has previously advocated adjusting the pace of bond purchases up and down as the recovery has proceeded in fits and starts, but his colleagues chose instead to maintain them at $US85bn per month from the start of the program in late 2012 through December 2013, when they voted to reduce them by $US10bn in January. They have reduced them further in $US10bn increments at each meeting this year.

Mr Bullard has had influence at times. He was a vocal supporter of the idea the Fed must defend its 2 per cent inflation target whether price increases exceed or fall short of it, leading the Fed in the summer of 2013 to make that commitment explicit.

Mr Bullard said that “US macroeconomic fundamentals remain strong” and his forecast for 3 per cent annualised growth in the second half of 2014 “remains intact.” But inflation has undershot the Fed’s 2 per cent target for more than two years, and market expectations for future inflation have recently declined.

“Inflation expectations are dropping in the US, and that is something that a central bank cannot abide,” Mr Bullard said. Referring to the process of gradually reducing, or tapering, the amount of monthly Fed bond purchases, he said, “we have to make sure that inflation, inflation expectations remain near our target, and for that reason, I think a reasonable response of the Fed in this situation would be to invoke the clause on the taper that said that the taper was data-dependent, and we could go on pause on the taper at this juncture.”

If incoming economic data remains robust, he said, “We could just end the program in December. But if the market’s right and this is portending something more serious for the US economy, then the committee would have an option of ramping up QE at that point.”

Later Thursday, though, Mr Bullard said he was growing uncomfortable with the Fed holding short-term interest rates near zero when it is approaching its inflation and employment goals.

“I’m a little nervous about staying at zero as the economy really continues to improve,” he said at a policy conference in Washington held by the New America Foundation, Young Invincibles and the Roosevelt Institute Campus Network. “I think we can start to move off zero at some point and still provide a lot of accommodation.”

Mr Bullard’s openness to extending the bond buying caught many in markets off guard, given that only days ago the official argued in favour of raising interest rates by the end of the first quarter of next year, in a view that put him at odds with key officials like New York Fed President William Dudley, who had said the summer of 2015 would be a more likely time to raise rates from near zero.

Michael Feroli, an economist at JP Morgan, said he doesn’t think the Fed will extending its bond buying program, the third such program and sometimes referred to as QE3. In a note to clients he said of Mr Bullard’s statements, “We are inclined to fade this comment and think the Fed will complete QE3 on schedule, taking the monthly purchase rate down to zero after the October 29th meeting.” But he added, “we do agree that the rationale Bullard offered for halting the taper, falling inflation expectations, will loom large at the next meeting and could influence the statement language.”

Eric Green, an economist at TD Securities, said “the Fed is fumbling through this as much as all of us, they don’t have all the answers, and are terrified of getting it wrong even if the slide in stock prices (move toward financial stability) has less of a negative effect than the positive impact generated from falling energy costs.” He suspects Mr Bullard’s comments suggest less confidence in the outlook, and that over the longer run, the Fed may be prepared to offer more support to the economy relative to what was expected only a few days ago.

Other Fed officials may resist changing course on winding down the bond-buying program. At least one, Philadelphia Fed President Charles Plosser, doesn’t appear to share Mr Bullard’s concern.

“I do believe inflation expectations remain well anchored,” Mr Plosser told reporters. He noted that Treasury Inflation-Protected Securities, which can provide signals of inflation expectations, can frequently undergo periods of volatility, and he suspects that whatever is going on in that market now reflects the “flood of demand” that has boosted the Treasurys market generally.

“We need to be careful” and not read too much into what’s happening with the Treasury inflation-indexed bonds right now, Mr Plosser said.

Meanwhile, Dallas Fed leader Richard Fisher, in a Fox Business Network interview on Wednesday, signalled little alarm over the slide in markets. “A market correction doesn’t mean the economy is in trouble,” he said.

Right now, “the market is correcting itself without the Fed involvement. It’s way too premature to talk about another [round of bond buying] because the market is actually doing the work” on its own, Mr Fisher said.

[greengiraffe]

http://www.cnbc.com/id/102094988

'Stunning' Fed move put bottom under stocks: Traders
Alex Rosenberg | @CNBCAlex
3 Hours Ago
CNBC.com

After a swift and serious selloff, stocks have managed to rise on Thursday's session with help from the soothing words of St. Louis Federal Reserve President James Bullard. And after dropping just shy of 10 percent from high to low, the S&P 500 looks to have finally bottomed out, some traders say.

"Whether the complete correction is over I'm not positive yet, but there looks to be some relative calm," said Jim Iuorio of TJM Institutional Services. "I think the next leg is going to be higher."

Iuorio is focusing on the comments Bullard made Thursday morning on Bloomberg TV, where he discussed the quantitative easing program, which the Fed is currently winding down.

He said, "We have to make sure that inflation expectations remain near our target. And for that reason, I think a reasonable response by the Fed in this situation would be to … pause on the taper at this juncture, and wait until we see how the data shakes out in December."

Read MoreBullard: Fed may want to keep up bond buying for now

Bullard's comments come two days after those of San Francisco Fed President John Williams (who, like Bullard, is a non-voting member of the Fed Open Market Committee). Williams told Reuters "If we get a sustained, disinflationary forecast… then I think moving back to additional asset purchases in a situation like that should be something we seriously consider."

Read MoreMore QE might be appropriate if economy faltered: Fed's Williams

The conclusion drawn by many is that, in the words of Rhino Trading Partners chief strategist Michael Block, "the stage is set to put QE back into place, thanks to Bullard's comments today. It's very dovish and very bullish for risky assets and we will treat it accordingly."

James Bullard, president of the Federal Reserve St. Louis.
Adam Jeffery | CNBC
James Bullard, president of the Federal Reserve St. Louis.
For Iuorio, the timing is striking.

"It's just rhetoric to try to jawbone some calm into the stock market, and to me that's absolutely stunning. Because if you look at the economic picture, there's been nothing to suggest that we're off-track," Iuorio said. "So [Bullard] must be responding to volatility in the stock market and lower prices in the stock market, and just kind of giving us a nod and a wink and saying, 'we have your back.'"

Like Iuorio, Brian Stutland of Equity Armor Investments does think the bounce off of Bullard's words will continue. After a scary slide on Wednesday, the trader believes that the worst is over.

"Basically what you saw was a complete wash-out," said Brian Stutland of Equity Armor Investments. "And I think now, we had a little correction. You have to price-average in if we have any more selloffs in the market."

Still, he adds that in his view, the days of wine and roses are over for stocks.

"I don't think we're going to have these half-percent move like we saw in September. We have some real volatility, and I think that continues into the end of the year," Stutland said. "But I think ultimately, stocks end up a little higher."

Of course, not everyone is buying in just yet. Carter Worth of Sterne Agee, who appeared on "Futures Now" on Tuesday to argue that the correction likely had further to go, told CNBC on Thursday he expects more downside still.

With the S&P 500 near 1,860, Worth wrote in an email: "I'm guessing we're going to see the mid to high 1700s."



Alex Rosenberg
Producer

[greengiraffe]

Fresh data unlikely to change Fed's mind: Rosengren
DOW JONES NEWSWIRES OCTOBER 18, 2014 12:15AM

Federal Reserve Bank of Boston President Eric Rosengren on Friday said he would be surprised if policymakers would see enough economic data to change their minds on ending the Fed's bond-buying program at their next policy meeting.

"I'd be surprised if in the next two weeks we get enough data to make us change our mind on" ending the bond-buying program, also known as quantitative easing, Mr Rosengren told CNBC in an interview. The central bank's next policy meeting is on October 29.

It will take "a little time" for the Fed to process the reason for recent volatility in financial markets, he said. The Fed will have to "factor that in," said Rosengren, "but I think it's a little bit too soon to make any judgement."

Mr Rosengren, asked about his inflation expectations, said the recent weakness in oil prices suggests inflation will be weaker "over the next six months." It may take "several years" for inflation to get to the 2 per cent level sought by the Fed, he added.

Mr Rosengren said recent economic data have not shifted enough to make him change his forecast.

Federal Reserve hints at extending bond buying program
DOW JONES OCTOBER 17, 2014 7:22AM

THE US Federal Reserve may want to extend its bond-buying program beyond October to keep its policy options open given falling US inflation expectations, Federal Reserve Bank of St Louis President James Bullard said.

“It would keep the program alive,” and the Fed’s options “open as to what we want to do going forward,” Mr Bullard said during an interview on Bloomberg TV.

The Fed has been winding down its bond-buying program, also called quantitative easing, which aims to stimulate the economy by lowering long-term borrowing costs. It decided at its September meeting to reduce the purchases to $US15 billion ($16.9bn) a month, and officials agreed to end the program after its October 28-29 meeting if the economy continued to improve as expected.

The Fed has repeatedly cautioned in its policy statements that the purchases “are not on a preset course,” and that the pace of reductions is contingent on policy makers’ “outlook for the labour market and inflation.”

But no other Fed official has indicated he or she might favour continuing the bond-buying programs after this month. Several officials opposed the purchases from the start and some who have supported them in the past believe the benefits diminish over time and might be outweighed by the risk of fuelling financial instability.

Mr Bullard, who is not currently a voting member of the monetary policy-setting Federal Open Market Committee, has often taken positions outside the consensus view among central bank officials. He has previously advocated adjusting the pace of bond purchases up and down as the recovery has proceeded in fits and starts, but his colleagues chose instead to maintain them at $US85bn per month from the start of the program in late 2012 through December 2013, when they voted to reduce them by $US10bn in January. They have reduced them further in $US10bn increments at each meeting this year.

Mr Bullard has had influence at times. He was a vocal supporter of the idea the Fed must defend its 2 per cent inflation target whether price increases exceed or fall short of it, leading the Fed in the summer of 2013 to make that commitment explicit.

Mr Bullard said that “US macroeconomic fundamentals remain strong” and his forecast for 3 per cent annualised growth in the second half of 2014 “remains intact.” But inflation has undershot the Fed’s 2 per cent target for more than two years, and market expectations for future inflation have recently declined.

“Inflation expectations are dropping in the US, and that is something that a central bank cannot abide,” Mr Bullard said. Referring to the process of gradually reducing, or tapering, the amount of monthly Fed bond purchases, he said, “we have to make sure that inflation, inflation expectations remain near our target, and for that reason, I think a reasonable response of the Fed in this situation would be to invoke the clause on the taper that said that the taper was data-dependent, and we could go on pause on the taper at this juncture.”

If incoming economic data remains robust, he said, “We could just end the program in December. But if the market’s right and this is portending something more serious for the US economy, then the committee would have an option of ramping up QE at that point.”

Later Thursday, though, Mr Bullard said he was growing uncomfortable with the Fed holding short-term interest rates near zero when it is approaching its inflation and employment goals.

“I’m a little nervous about staying at zero as the economy really continues to improve,” he said at a policy conference in Washington held by the New America Foundation, Young Invincibles and the Roosevelt Institute Campus Network. “I think we can start to move off zero at some point and still provide a lot of accommodation.”

Mr Bullard’s openness to extending the bond buying caught many in markets off guard, given that only days ago the official argued in favour of raising interest rates by the end of the first quarter of next year, in a view that put him at odds with key officials like New York Fed President William Dudley, who had said the summer of 2015 would be a more likely time to raise rates from near zero.

Michael Feroli, an economist at JP Morgan, said he doesn’t think the Fed will extending its bond buying program, the third such program and sometimes referred to as QE3. In a note to clients he said of Mr Bullard’s statements, “We are inclined to fade this comment and think the Fed will complete QE3 on schedule, taking the monthly purchase rate down to zero after the October 29th meeting.” But he added, “we do agree that the rationale Bullard offered for halting the taper, falling inflation expectations, will loom large at the next meeting and could influence the statement language.”

Eric Green, an economist at TD Securities, said “the Fed is fumbling through this as much as all of us, they don’t have all the answers, and are terrified of getting it wrong even if the slide in stock prices (move toward financial stability) has less of a negative effect than the positive impact generated from falling energy costs.” He suspects Mr Bullard’s comments suggest less confidence in the outlook, and that over the longer run, the Fed may be prepared to offer more support to the economy relative to what was expected only a few days ago.

Other Fed officials may resist changing course on winding down the bond-buying program. At least one, Philadelphia Fed President Charles Plosser, doesn’t appear to share Mr Bullard’s concern.

“I do believe inflation expectations remain well anchored,” Mr Plosser told reporters. He noted that Treasury Inflation-Protected Securities, which can provide signals of inflation expectations, can frequently undergo periods of volatility, and he suspects that whatever is going on in that market now reflects the “flood of demand” that has boosted the Treasurys market generally.

“We need to be careful” and not read too much into what’s happening with the Treasury inflation-indexed bonds right now, Mr Plosser said.

Meanwhile, Dallas Fed leader Richard Fisher, in a Fox Business Network interview on Wednesday, signalled little alarm over the slide in markets. “A market correction doesn’t mean the economy is in trouble,” he said.

Right now, “the market is correcting itself without the Fed involvement. It’s way too premature to talk about another [round of bond buying] because the market is actually doing the work” on its own, Mr Fisher said.

[greengiraffe]

Debelle's candour a foil to silver tongues of central bankers

Comment Karen Maley
775 words
20 Oct 2014
The Australian Financial Review
AFNR
English
Copyright 2014. Fairfax Media Management Pty Limited.

Can the soothing words of central bankers stop investors stampeding for the exits?

That's the key question after last week's calamitous sell-off in global equity markets frayed investor confidence and evoked the spectre of a fresh financial crisis.

Of particular concern are the big United States and United Kingdom hedge funds which have borrowed trillions of dollars to make massive speculative bets, but are now nursing huge losses on their positions. At the beginning of the year, the "smart money" investors positioned themselves to take advantage of a pick-up in global growth. They shorted US bonds in the expectation that stronger growth would prod the US central bank into raising interest rates next year. And they poured money into Europe, attracted by the relatively attractive market valuations, and the generous yields they could pick up by the bonds of countries such Spain and Portugal.

But their assumptions have proved disastrously wrong. Disappointing growth in Europe and China has sent commodity prices and the oil price tumbling. At the same time, growing global deflationary pressures – the US producer price index fell in September for the first time all year - have weighed on US bonds, pushing yields lower. Badly wrong-footed, many hedge funds had little choice but to try to stem their bleeding by offloading their investments in an illiquid market.Hedge-fund scramble

This explains the dramatic collapse in US bond yields last Wednesday, which came as a number of big hedge funds scrambled to unwind their loss-making positions. In tumultuous trading, the yield on 10-year US bonds plunged by 34 basis points to hit a low of 1.86 per cent as hedge funds, which had shorted US bonds in expectation that bond prices would fall, rushed to close out their bearish bets by buying bonds (bond prices and yields move in inverse directions).

Meanwhile, in Europe, hedge funds are haemorrhaging as interest rate spreads are again blowing out on concerns about the bleak economic outlook. Investors are again selling the bonds of "peripheral" countries such as Greece, Italy, Spain and Portugal which are seen as riskier and are flocking into safe investments, particularly bellwether German bunds.

But central bankers appear determined to stop financial markets from once again being gripped by fear.

After all, the huge run-up in global equity markets is largely due to their efforts in stoking global liquidity. The S&P 500 has soared by 80 per cent since March 2011, as investors have cheered the US central bank's successive rounds of bond buying. Meanwhile, European sharemarkets have climbed by more than 40 per cent since July 2012 when Mario Draghi, the head of the European Central Bank, promised to do "whatever it takes" to save the euro.

So, as though an email had been sent around calling for action to stem the vertiginous market slide, central bankers last week rushed to provide reassurance. Fed official floats 'further stimulus'

On Thursday, equity markets rallied after a US Federal Reserve official said the central bank should consider continuing its bond buying program this month, instead of halting it as expected. St. Louis Fed president James Bullard argued that worries about falling inflation, and the risk that the Europe's debt crisis could reignite if the region plunged back into a triple-dip recession, meant there was a case for the US central bank continuing its unorthodox monetary stimulus.

Not to be outdone, the vice-president of the European Central Bank, Benoît Coeuré said the central bank would start buying private-sector debt instruments "within days" to boost liquidity in the region, while Bank of England's chief economist Andy Haldane said the gloomier outlook for global growth meant the UK central bank could keep interest rates lower for longer.

But a central banker who appears not to have received the email is Guy Debelle, the assistant governor (financial) at the Reserve Bank of Australia. In a refreshingly candid speech on Tuesday, Debelle warned of the possibility of a "violent" sell-off in global markets, particularly in bond markets.

Debelle noted that markets are now less liquid and that many investors appeared to believe they could offload their investments ahead of a market sell-off. "History tells us that this is generally not a successful strategy. The exits tend to get jammed unexpectedly and rapidly." Some investors had taken positions that depend on being able to borrow at close to zero interest rates.

"When funding costs are no longer zero, these positions will blow up", Debelle warned.


Fairfax Media Management Pty Limited

Document AFNR000020141019eaak0000r